What is a QTIP Trust and How Can it Help You

It’s all about control and money. Proper estate planning can accomplish two main goals, estate tax minimization and control of assets after death. The Qualified Terminable Interest Property trust, also known as a QTIP Trust, is an estate planning tool that allows individuals to address both goals of tax minimization and maintaining control of assets after death. The QTIP Trust can control how assets will be distributed at death and who will benefit from those assets.

In addition, all assets left in this trust after the death of the first spouse will pass into the trust for the benefit of the surviving spouse without any estate tax due at the first death. While those assets will be includable in the surviving spouse’s estate, the surviving spouse can use other strategies to minimize taxes at his or her own death.

Many individuals or married couples create a Last Will and Testament or use other simple estate planning tools to ensure their wishes are carried out at death. However, these estate plans often leave all assets to the surviving spouse when the first spouse dies. This seems logical, given that the first spouse to die would typically want the surviving spouse to be taken care of. This planning works best for couples who are still in their first marriage, do not have a lot of assets, and do not have children from previous marriages or relationships. A simple Last Will and Testament leaving all assets outright to the surviving spouse can be very cost efficient and can work very well for the surviving spouse and other heirs involved. But when couples have children from previous marriages and a significant amount of assets, this can be a true nightmare.

QTIP Trusts vs. Traditional Estate Plans

With simple estate plans that leave all assets outright to the surviving spouse, that spouse has full control over the assets. He or she can spend all of the money, use all of the assets, or even give them away to children, heirs, charities, or anyone else. But what if it wasn’t the deceased spouse’s intent for that property to be given away? Or what if this was a second marriage and each spouse had children from previous marriages they want to provide for? The first spouse’s children may have concerns that the step-parent will spend all of the money or even give that money to his or her own children. This can obviously cause serious rifts in the relationship between a surviving spouse and the children of the deceased spouse. Once the assets are given to the surviving spouse outright, the deceased spouse no longer has control over those assets. In comes the QTIP Trust.

QTIP Trusts - The Preferred Estate Plan for Second Marriages

Because of its ability to provide income for the surviving spouse during his or her remaining life and also control where the assets go at the death of the second spouse, the QTIP trust is a commonly used by couples who have children from previous marriages. When the first spouse dies, the QTIP trust can be funded with that spouse’s investment accounts, retirement accounts, or other assets. The trust will then pay all income produced by those assets to the surviving spouse as long as he or she is living. At the death of the second spouse, the assets can pass to the individuals named by the first spouse. This is a simple and effective way for married couples to provide for each other after death, avoid estate taxes at the first death, and still provide for children or other heirs over the long run. QTIP Marital Trusts are often used in conjunction with Bypass Trusts to create an efficient estate plan.

When control is important, taking care of a spouse is important, and children or other heirs are important, then a QTIP trust is essential. There is no better tool for accomplishing these goals.